By Laura Kusisto
Nov. 26, 2023 5:30 am ET
The litigation that could end up changing how millions of Americans buy and sell homes was hiding in plain sight for three decades.
The current set of rules governing how agents are paid, which effectively mean sellers are the ones who set compensation for buyer agents, date to the 1990s. Those rules have come under significant scrutiny, particularly as commissions have remained around 5% to 6% of the sale price even as home values have skyrocketed and many buyers do more of the work finding a home themselves online.
A Kansas City jury last month delivered a $1.8 billion verdict to home sellers in Missouri against the National Association of Realtors and major brokerages, finding they had conspired to keep commission rates high. A judge could triple that to $5 billion. NAR says it plans to appeal.
Groups as varied as the Consumer Federation of America and the Cato Institute have published papers accusing the industry of working to keep Realtor commissions high. The Justice Department has conducted high-profile investigations of NAR twice in the last 20 years. Plaintiffs’ attorneys said they would often field calls from home sellers interested in filing lawsuits.
For three decades all those efforts amounted to very little.
“It seemed a little bit out of reach. You would need an entire industry to be reformed,” said Benjamin Brown, co-chair of the antitrust practice at Cohen Milstein, a 100-lawyer plaintiffs’firm known for suing big companies and banks.
A call five years ago from a Minnesota consumer advocate and lawyer with a one-person firm would change that.
George Farah, then a partner at Cohen Milstein, took the call with the advocate who had spent decades investigating practices in the industry. Farah says he readily talks to advocates about case ideas and has at times had to listen to a 45-minute soliloquy about how squirrels in the park are creating a shortage by hoarding nuts.
But this time Farah readily saw the potential for a major antitrust case. “C’mon, this is just sitting here,” he remembered thinking. “I was stunned to see that it hadn’t happened yet.”
Farah, who has since started his own firm with a couple other attorneys, said he combed through every rule in NAR’s roughly 175-page handbook and homed in on the requirement that homes listed on a multiple listing service must advertise the compensation offered to the buyer’s agent. Plaintiffs attorneys would ultimately argue that the rule, in combination with a few others, allowed the industry to conspire to keep commissions high, in part by allowing buyers’ agents to steer clients away from homes where sellers offer a lower commission.
Farah wasn’t the only one scrutinizing the industry’s rules. The Justice Department concluded an investigation into similar issues near the end of the Trump administration, resulting in modest rule changes. The Biden administration tried to reopen the investigation but was blocked in court—a ruling it has now appealed.
Attorneys filed a lawsuit in an Illinois federal court in March 2019. They knew that others might follow, and sure enough an attorney in Kansas City saw news reports about the suit and a similar one was filed in Missouri less than two months later.
Getting the cases to trial was still a major financial gamble for the firms involved, requiring millions of dollars spent out of pocket and tens of thousands of hours of unpaid attorney time.
Antitrust cases almost always settle before trial, giving attorneys some assurance they will get paid something. But in this case, the damages were so high and the threat to the industry so existential that plaintiff attorneys thought it unlikely NAR would settle. The potential damages in the two cases combined could surpass $40 billion.
An NAR spokesman said the group “always has been open to a resolution that maintains a way for buyers and sellers to continue to benefit from the cooperation of real-estate professionals and eliminates our members’ risk of liability for the claims alleged.”
Brown, the Cohen Milstein lawyer, recalls that at one point his firm’s managing partner had dinner with a partner at a prominent defense firm who warned that the case was all-or-nothing. After the dinner the managing partner asked him, “Are you sure you know what you’re doing?”
Taking such a case to trial would require getting a jury of ordinary Midwesterners to understand an industry with complicated rules, as well as reams of statistical and economic analysis.
“There’s such a risk that the jurors just go to sleep,” said Adam Zimmerman, a law professor at the University of Southern California who studies class actions.
In October, the Missouri case went to trial. Two major brokerage firms had already agreed to a modest settlement of about $140 million combined, but NAR and two other national brokerages hadn’t settled.
By then the financial stakes were significant, not only for the industry but for the firms involved. Michael Ketchmark, a lawyer at a Kansas City firm with just three other lawyers, argued the case. He said it cost nearly $10 million to get the case to trial, financed by lawyers and their families and a line of credit. Ketchmark said he got the first bill from his expert witnesses, opened it and was shocked when he saw the number: $1.7 million.
Nonetheless, the plaintiff attorneys could reap millions if the verdict stands. The attorneys will have to apply to a judge for compensation, which in smaller class actions can be about 25% of the monetary damages. The percentage award for a verdict of this size could be significantly lower, however.
At trial, plaintiff attorneys sought to portray the case as a David and Goliath-type fight and recruited plaintiffs, including a 41-year-old former police officer named Jerod Breit who now works at Mothers Against Drunk Driving.
Breit, who sold a home in St. Louis in 2017, said he heard about the case through a local attorney he knows. He used vacation time to give a deposition and testify at trial.
The trial lasted about two weeks, and the jury rendered a verdict in just a couple of hours.
Breit said he was at work when he got a call on his cell from one of the lawyers about the verdict. “Wow, I can’t believe it,” he thought and then had to go right back to his day. He was worried his participation in the case now making headlines might create bad blood with the agent he just used to buy a house.
But Breit was relieved when he got an invitation to her house to pick up a Thanksgiving pie.